Turkey’s central bank announced a bigger-than-expected interest rate cut on Thursday – marking the latest in a string of policy moves that have seen investors punish the lira and economists warn of even more inflation pain for Turkish consumers.
Central bank policymakers led by Governor Sahap Kavcioglu, slashed Turkey’s benchmark interest rate by two percentage points to 16 percent – a massive cut that exceeded most forecasts.
The announcement followed on the heels of last week’s midnight firing of three central bank policymakers by President Recep Tayyip Erdogan, who has regularly blamed high interest rates for inflation in the country – a view that is contrary to that of most economists.
Prices in Turkey have been soaring, with the country’s annual inflation rate running just shy of 20 percent in September.
Three central bank governors have been sacked by the government during the last two and a half years, prompting questions by opposition leaders and some of the country’s most important trade groups over the independence of the central bank.
Earlier this month, the head of Turkey’s largest opposition party even took the step of visiting the central bank, to deliver his concerns in person.
Kemal Kilicdaroglu, who heads the Republican People’s Party, or CHP, told reporters he was hoping to encourage the body to exercise its independence. It is a largely unprecedented visit by an opposition leader to the central bank, said economist Atilla Yesilada, an analyst at GlobalSource Partners.
“Kilicdaroglu’s main objective was not to ask what’s going on, but to remind the central bank governor if he continues with these interest rate cuts, he shall be held legally liable,” Yesilada told Al Jazeera.
Thursday’s rate cut was roundly condemned by opposition leaders on social media. Kilicdaroglu said Erdogan and the bureaucrats following him were “leading the country towards hunger,” and that their actions were either signs of a “betrayal of the nation or a health problem.”
Meral Aksener, head of the country’s third largest opposition party, called it “an irrational decision made by a frivolous government through an unqualified bureaucrat.” And Former Prime Minister Ahmet Davutoğlu said “instead of fighting inflation, the central bank seems to be under the control of politics.”
Within an hour of the central bank’s interest rate announcement on Thursday, the Turkish lira hit 9.49 against the US dollar, a new record low.
The lira has lost more than 20 percent of its value against the US dollar this year alone – a rapid erosion that has had a domino effect on the rest of the economy, and stirred disturbing memories of an inflationary cycle that gripped the country in the 1990s.
“For most Turks, the strength of their domestic currency is also a barometer for the strength and health of their economy,” said Yesilada. “I lived through the 1990s, when the depreciation of the lira immediately caused a rise in inflation. People simply based their future financial decision making on the value of the lira.”
“It was a vicious cycle,” Yesilada added. “and Turkey is on the verge of falling into that trap again.”
Just the essentials
There are signs the country’s economic troubles are already stretching Turks to the breaking point.
Every Wednesday afternoon in Istanbul’s Carsamba neighbourhood, the streets transform into one of the country’s largest street bazaars. Hundreds of stalls spring up overnight to present everything from fruits and vegetables to cheeses and olives, carried on trucks from outside the city that stream into the narrow streets. Istanbul’s weekly bazaars usually offer the best deals – with sellers calling out prices that drop as the day progresses – but even here the cost of the basics goes up every few weeks. Eggs, onions, potatoes, tomatoes, olives, peppers – essentials for much of the meals served in the surrounding homes in the working-class neighbourhood have fluctuated wildly during the last year, sometimes doubling.
A block away, a steady stream of shoppers lined up to buy bread from the shops selling subsidised bread from the city municipality. At a grocery store nearby, the owner, a portly man with a greying beard who declined to be named, wrote the prices of each item, alongside where in the country they come from, in flowing script on cards that he said he changes every few days now.
“Everything here has gone up, even in the last month,” he told Al Jazeera. “These chestnuts, these grapes, they have doubled. Look at that cooking oil, it’s 70 TL a can now,” he said pointing to large containers stacked near the entrance. “You can’t live without cooking oil. People are buying things, but they are mostly buying the things they need, and they are buying larger quantities because they know it will be more expensive the next time they shop.”
“People leave their kids at home when they come to shop now, or they make sure to tell them not to buy snacks or candy,” said Hayati, who owns a corner store nearby that stocks bread, eggs, cheeses, deli meats and other basics. “People are buying half portions. Someone who came in and used to buy a whole sausage now asks for half, half a piece of cheese, half the yoghurt, like that.”
People are buying half portions
Hayati has a small booklet of people he has given things to on credit, but he has become more selective about that, as well. “Our rent has gone up, from 1,500 TL a month to 3,000 TL a month, so we cannot give more people credit, just the families I know and trust.”
Like many Turks old enough to remember, Hayati said the current situation is not as bad as it was in the 1990s, when the country saw triple-digit inflation and dumbfounding currency devaluation.
“But back then, people did not have as much debt as they have now,” said Hayati. “Today, we have smartphones, electronics, all these things that people want to show they have a comfortable lifestyle, and they are going into debt to maintain that appearance. In the 90s being poor was not a problem, it was not something to be ashamed of.”
Meanwhile, government efforts to try and tackle food prices have not proven effective. Before local elections in 2019, authorities set up stalls all over the country to sell vegetables at lower prices directly to consumers, in an effort to combat what President Erdogan said at the time was a campaign by prices manipulators to “terrorise” society. Thousands of people lined up to buy produce from the stalls, but soon after the elections were over, they disappeared.
Everything here has gone up, even in the last month
In the last few weeks, Erdogan has ordered investigations into the country’s largest chain stores for alleged price gouging, and pledged to expand farmer cooperatives that he said cut out the middlemen.
Utility companies supplying essentials like natural gas have become saddled with debt, largely denominated in foreign currency. So have Turkey’s banks. More than 50 percent of bank debt in the private and public sector is denominated in foreign currency, so every time the lira falls, that debt becomes more onerous to service.
Rental prices in most cities, including Istanbul, have gone up by at least 50 percent, and families who depend on the minimum wage, currently at just 3,577 lira a month ($378), are finding it harder to make ends meet.
Nearly 300,000 bills have been paid, for instance, through an Istanbul municipal program set up last year to allow anonymous benefactors to pay the utility bills of families with less than 940 lira a month ($94) per-person income.
A cycle of distrust
Some of Turkey’s most important trade associations and tycoons have voiced rare concerns during the last few weeks, drawing attention in particular to the central bank’s apparent lack of independence.
The country needed to undertake a “fundamental reform agenda,” Omer Koc, who heads Koc Holding, said earlier this month.
Koc, who has weathered political tension with President Erdogan, had been largely silent about the economic downturn the country has seen in recent years.
“It is obvious that, for the sake of peace in our country and for sustainable economic growth, it is necessary to act in accordance with reason and with science,” Koc said.
Koc Holding, which includes the country’s largest oil refinery and contracts for automobile manufacturers, accounted for 6 percent of Turkey’s gross domestic product in 2020.
That call for respecting the independence of the central bank was echoed earlier this week by the Turkish Industry and Business Association, which represents some 4,500 companies that account for 85 percent of the country’s foreign trade.
“There is quite a bit of unrest in society, the poverty rates are going up, and these institutions are probably voicing these concerns on behalf of the society,” said Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum and a former US Federal Reserve economist.
Companies relying on imports had already said they were risking bankruptcy when the lira was trading at eight against the dollar, Demiralp said, and now that rate was being pushed even higher, making it more and more expensive not only to continue business as usual, but also to pay off the debt incurred in recent years that is largely denominated in foreign currency.
The central bank’s power to control inflation is its interest rate policy. Despite calls from economists to keep that rate high, policymakers are lowering borrowing costs, missing their own targets for inflation, which have been around 5 percent, Demiralp said, and producing an “inertia” of distrust that is predicated on the real inflation rate, which is at least 20 percent.
“The central bank’s policies, which have never been tight enough, was the main reason that led to this inertia,” Demiralp told Al Jazeera. “Because people saw, year after year, the central bank is not only unable to make its [inflation] target, but also deviating further and further away from that target. So when you are pricing your contracts, you look at the real inflation from the year before, as opposed to the central bank’s target.”
In an economy where the central bank appears to accurately gauge inflation, lower policy rates would prompt lower rates in the market as well. “But what we see in Turkey is the opposite,” Demiralp said.
“The central bank is cutting interest rates but it backfires, and it actually increases long term interest rates … it is building up risk and its not consistent with the country macroeconomic fundamentals, because when you see your actual inflation rate is about four times higher than your target, you don’t have any room for rate cuts.”